Veeva Drops 14%: Great Results Not Enough for Pricey Stock, Say Bears

Shares of life sciences cloud software vendor Veeva Systems (VEEV) today closed down $8.78, or almost 14%, at $64, despite the company yesterday afternoon beating fiscal Q1 expectations, and forecasting higher as well.

The response from most Street analysts was high praise for the company’s achievement, but the bears write today that it wasn’t quite enough given an elevated valuation for the stock.

For example, Evercore’s Kirk Materne, who has an “In Line” rating on the shares, wrote in a note to clients that it was a “solid quarter,” but that "with shares up more than 59%, year to date, trading at 11x calendar 2018 revenue [estimates], expectations were high.” Indeed, he thinks the current share price reflects all the potential upside in Veeva’s newer product, called “Vault."

Likewise, Raymond James’s Brian Peterson, who has a Market Perform rating the stock, writes that even after the stock slide last night, "shares are still trading at 11x our revised FY18 revenue estimate, making VEEV the second most expensive stock in all of app software."

CFO Tim Cabral was kind enough to take a few minutes to talk with me by phone this afternoon, along with Veeva’s chief marketing officer, Nitsa Zuppas. Iasked Cabral whether he had any thoughts on the valuation claim raised by Materne.

Cabral demurred, saying it’s really the purview of investors and analysts to decide the right share price. “If I was an expert on the market, and where it’s supposed to trade, I would be in a different line of work, he said.

Among the highlights of the quarter, Cabral noted that the company expanded its business with one of the top five consumer packaged goods makers. That is an important proof of the company’s ability to expand beyond just its life sciences customer base, as Cabral had pointed out in a conversation he and I had last quarter.

Basically, that consumer goods customer started out purchasing the company’s Vault software as a “platform” for content management, but to run someone else’s software app. This quarter, the same customer added a license for Veeva's “Quality One” product, showing how the company’s been able to generate repeat, follow-on business even outside life sciences.

Despite the drop, and the pricey stock, both bull and bear had high praise today for the company.

Brent Bracelin ofKeybanc reiterates an Overweight rating, and a $70 price target, writing that he has "increasing confidence that VEEV remains on track to eclipse $1 billion in revenue within three years,” a reference to management’s target for 2020’s sales.

Bracelin is dazzled by the company's cash generation:

Operating profits increased 42% y/y to $52.3M, outpacing the 27% y/y revenue growth rate. This handily exceeded consensus of $46.9M with upside driven by the fourth consecutive quarter of 30%-plus operating margin. Strong seasonal cash collections accentuated improving operating leverage, which drove FCF to $192M in the first half (equating to 59.6% margin). The seasonal consumption of cash in the second half could still result in impressive full-year FCF margin north of 25%.

Needham & Co.’s Scott Berg reiterates a Buy rating, and a $70 price target, writing that it was “another strong quarter,” and in particular, the company’s ability to beat expectations for its operating profit margin by almost 3 percentage points “yields significant visibility into how the company can eclipse the 30% operating margin and 30% operating cash flow thresholds for fiscal 2018 as a whole."

"While it's background noise for investors in the near-term, with the News Feed overhaul and other actions that Facebook has implemented over the past few months, its clear with more 'heat in
the kitchen from the Beltway' that further modest changes to their business model around advertising and news feeds/content could be in store over the next 12 to 18 months," analyst Daniel Ives wrote.

The market for 3-D sensing in smartphones could be worth $10 billion by 2021, opines David Dai of Bernstein, which should be good news for suppliers such as Sony, AAC Technologies, Sunny Optical Technology Group, Largan Precision; Lumentum Holdings, and ams AG. Apple is leading with the iPhone, but there's a whole new wave of technology coming called "time of flight."

Twilio's "Flex" software, and Microsoft's "Teams" program are examples of how enterprise applications are changing to embrace the "wave of change" rippling through corporations, emphasizing collaborations between far-flung teams of people, write analysts at Canaccord Genuity.

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